UK Sole Trader Tax Bands and Director Rates for 2025/26

Income Tax Bands for 2025/26: England, Wales and Northern Ireland

The UK income tax bands for 2025/26 have not changed since 2021. The personal allowance is frozen at £12,570, and the basic rate band ceiling sits at £50,270. Frozen thresholds combined with rising wages and profits push more earners into higher rate tax each year, which is the policy point most planning conversations should start from.

The rates below apply to England, Wales and Northern Ireland. Scotland sets its own non-savings, non-dividend rates (starter 19%, basic 20%, intermediate 21%, higher 42%, advanced 45%, top 48%). Scotland has seven bands for 2025/26: the advanced rate (45%) applies to income from £75,001 to £125,140, sitting between the higher and top rates.

Band	Taxable income (2025/26)	Rate
Personal allowance	Up to £12,570	0%
Basic rate	£12,571 to £50,270	20%
Higher rate	£50,271 to £125,140	40%
Additional rate	Above £125,140	45%

Source: gov.uk: Income Tax rates and Personal Allowances (ITA 2007 Part 2).

The personal allowance taper

If your adjusted net income exceeds £100,000, the personal allowance reduces by £1 for every £2 above that threshold. At £125,140 the allowance is zero. This creates an effective 60% marginal tax rate on income between £100,000 and £125,140, because every £2 of extra income loses £1 of allowance, adding an extra 20% on top of the 40% higher rate already applying.

Pension contributions are the primary lever here. Contributing enough to a personal pension to pull adjusted net income below £100,000 restores the full £12,570 allowance and returns the marginal rate to 40%.

UK Sole Trader Tax Bands: Income Tax Plus Class 4 NIC

A sole trader's total tax burden is income tax plus Class 4 National Insurance, both charged on trading profit. The combination creates a substantially higher effective rate than the income tax headline suggests.

Class 4 NIC rates for 2025/26

Class 4 NIC applies at 6% on profits between £12,570 and £50,270, then 2% above £50,270 (SSCBA 1992 s.15). The 6% rate has applied since 6 April 2024, reduced from 9% in earlier years. Class 2 NIC was abolished from 6 April 2024 for sole traders with profits at or above the Small Profits Threshold. The combined marginal rate in the basic rate band is therefore 26% (20% income tax plus 6% Class 4 NIC).

Profit level	Income tax	Class 4 NIC	Combined marginal rate
Up to £12,570	0%	0%	0%
£12,571 to £50,270	20%	6%	26%
£50,271 to £125,140	40%	2%	42%
Above £125,140	45%	2%	47%

Worked example: sole trader with £45,000 profit

A freelance graphic designer based in Leeds has taxable profits of £45,000 in 2025/26. Here is the full calculation:

Step 1: Taxable profit after personal allowance
£45,000 minus £12,570 personal allowance = £32,430 taxable profit.

Step 2: Income tax
£32,430 is entirely within the basic rate band (the basic rate ceiling is £50,270). Tax at 20% = £6,486.

Step 3: Class 4 NIC
£32,430 (same band, profits above £12,570 up to £50,270) at 6% = £1,946.

Step 4: Total tax and NIC
£6,486 (income tax) plus £1,946 (Class 4 NIC) = £8,432. The effective rate on gross profit is 18.7%. Note how Class 4 NIC at 6% adds nearly a third on top of the income tax charge: this is the structural reason many sole traders consider incorporation once profits consistently exceed £40,000 to £50,000.

Worked example: sole trader with £70,000 profit

A management consultant in Manchester has taxable profits of £70,000.

Step 1: £70,000 minus £12,570 = £57,430 taxable profit.

Step 2: Income tax (band-stacked)
First £37,700 (the basic rate band from £12,571 to £50,270) at 20% = £7,540.
Remaining £19,730 (£57,430 minus £37,700) at 40% = £7,892.
Total income tax: £7,540 plus £7,892 = £15,432.

Step 3: Class 4 NIC (band-stacked)
£37,700 (profits £12,570 to £50,270) at 6% = £2,262.
£19,730 (profits above £50,270) at 2% = £395.
Total Class 4 NIC: £2,262 plus £395 = £2,657.

Step 4: Total
£15,432 plus £2,657 = £18,089. Effective rate on gross profit: 25.8%.

For a comparison of how these figures look against the equivalent limited company position, see our guide to the sole trader versus limited company tax calculator for 2025/26.

Limited Company Director: Salary, Employer NIC and Dividend Tax Bands

A director-shareholder of an owner-managed company faces two tax layers: corporation tax inside the company, then income tax on extraction. The optimal extraction mix depends on whether the Employment Allowance is available.

Employer NIC for 2025/26: 15% above £5,000

From 6 April 2025, the employer (secondary Class 1) NIC rate is 15% on earnings above the secondary threshold of £5,000 a year (£96 a week) (gov.uk employer thresholds 2025/26; SSCBA 1992). This replaces the previous rate of 13.8% above a £9,100 secondary threshold that applied up to 5 April 2025. The Employment Allowance for 2025/26 is £10,500, but it is not available to a company whose only employee is a single director (National Insurance Contributions Act 2014).

The practical implication for director salary-setting is that two strategies apply, depending on whether a genuine second employee is on payroll:

• Single-director company (no Employment Allowance): set salary at the secondary threshold of £5,000. No employer NIC is due. The salary is below the primary threshold (£12,570), so no employee NIC either. The personal allowance is unused (a drawback if it cannot be used elsewhere).
• Company with a genuine second employee (Employment Allowance available): set salary at the personal allowance level of £12,570. The employer NIC on the £7,570 above the secondary threshold is £1,135.50 (15% of £7,570), but the Employment Allowance covers it. The full £12,570 salary uses the personal allowance, eliminating income tax on that amount.

Dividend tax rates for 2025/26 and 2026/27

Dividends are taxed at separate rates and sit on top of all other income. They are taxed last, meaning the band they fall into is determined by adding dividends to salary and other income. The dividend allowance is £500 for 2025/26.

Taxpayer band	Dividend rate 2025/26	Dividend rate 2026/27 (enacted)
Basic rate	8.75%	10.75%
Higher rate	33.75%	35.75%
Additional rate	39.35%	39.35%

The 2026/27 rates are enacted law, not a proposal. Finance Act 2026 s.4 amends ITA 2007 s.8, raising the ordinary rate to 10.75% and the upper rate to 35.75% "for the tax year 2026-27 and subsequent tax years." Finance Act 2026 received Royal Assent on 18 March 2026. Any dividends paid on or after 6 April 2026 attract the higher rates, regardless of when the underlying profits arose.

For a deeper look at how these rates interact with the salary-and-dividend split, see our guide to dividend tax rates for 2025/26.

Worked example: limited company director with £80,000 company profit (2025/26)

A director of a single-director company (no Employment Allowance) with £80,000 pre-tax company profit. The optimal salary for a single-director company is £5,000 (the secondary threshold), as this avoids employer NIC entirely. Using 2025/26 dividend rates (8.75%/33.75%).

Step 1: Corporation tax
Director salary £5,000 is corporation-tax-deductible. Taxable profit: £80,000 minus £5,000 = £75,000. Marginal relief applies (£75,000 is between £50,000 and £250,000): £9,500 (19% on first £50,000) plus £6,625 (26.5% on the next £25,000) = £16,125 corporation tax. Net distributable profit: £75,000 minus £16,125 = £58,875.

Step 2: Income tax on director salary
Salary £5,000 is within the personal allowance (£12,570). No income tax. No employee NIC. No employer NIC (salary at or below the secondary threshold).

Step 3: Dividend tax (2025/26 rates)
Dividends extracted: £58,875. Personal allowance remaining after £5,000 salary: £7,570, which absorbs the first £7,570 of dividends at 0%. Dividend allowance: £500 at 0%. The £500 dividend allowance is a nil-rate band: it is taxed at 0% but still occupies basic-rate band space, leaving £37,200 of the basic-rate band (not £37,700) available for dividends taxed at rate.
Dividends at basic rate: £37,200 at 8.75% = £3,255. Higher rate dividends: £58,875 minus £7,570 minus £500 minus £37,200 = £13,605 at 33.75% = £4,592. Total dividend tax: £3,255 plus £4,592 = £7,847.

Step 4: Total tax
Corporation tax £16,125 plus dividend income tax £7,847 = £23,972 on £80,000 of company profit. Net personal take-home: £5,000 salary + £58,875 dividends minus £7,847 dividend tax = £56,028. Effective rate on gross profit: 30.0%.

Corporation Tax Rates and Marginal Relief for 2025/26

Corporation tax on company profit uses a three-band structure. The limits are divided among associated companies and time-apportioned for short accounting periods.

Profit level	Rate	Notes
Up to £50,000	19% (small profits rate)	Lower limit; divided by associated companies
£50,001 to £250,000	19% to 25% (marginal relief)	Effective marginal rate on this band: 26.5%
Above £250,000	25% (main rate)	Upper limit; divided by associated companies

Source: gov.uk: Corporation Tax rates and allowances (CTA 2010 Part 3).

The 26.5% effective marginal rate in the £50,000 to £250,000 band is not an accident: to blend from an effective rate of 19% at £50,000 up to 25% at £250,000, the profit in the marginal band is taxed at 26.5% at the margin. A company with £100,000 profit effectively pays: £9,500 (19% on first £50,000) plus £13,250 (26.5% on the next £50,000) = £22,750 total, or an effective rate of 22.8%.

For a worked through calculation of marginal relief in different scenarios, see our guide to corporation tax marginal relief for 2025/26.

National Insurance for Employers and Employees in 2025/26

Employer NIC (secondary Class 1)

From 6 April 2025: 15% on earnings above £5,000 per year (£96 per week). The Employment Allowance offsets up to £10,500 of employer NIC for eligible businesses, but is not available to single-director companies. The Lower Earnings Limit is £6,500 per year (£125 per week), which preserves the employee's contributory entitlement even when little NIC is actually paid.

Employee NIC (primary Class 1)

8% on earnings between the primary threshold (£12,570 per year) and the upper earnings limit (£50,270 per year). 2% on earnings above £50,270. A director taking salary at exactly £12,570 pays no employee NIC, because the salary exactly matches the primary threshold.

Class 4 NIC for the self-employed

6% on profits between £12,570 and £50,270. 2% on profits above £50,270. Class 2 NIC was abolished from 6 April 2024 (gov.uk employer thresholds; National Insurance Contributions Act 2024). Sole traders with profits at or above the Small Profits Threshold are treated as having paid Class 2 and keep their state pension entitlement. Those below the threshold can pay voluntary contributions.

Capital Gains Tax Rates for 2025/26

From 30 October 2024, the CGT rates for individuals on all chargeable assets (including residential property) are 18% on gains within the basic rate band and 24% on gains above it (gov.uk: CGT rates; TCGA 1992 s.1H). The 28% rate on residential property that applied before October 2024 no longer applies. The annual exempt amount is £3,000 for 2025/26 and 2026/27.

Business Asset Disposal Relief (BADR) provides a reduced rate on qualifying business disposals up to a £1,000,000 lifetime limit per individual (gov.uk: BADR; TCGA 1992 ss.169H to 169S):

• Disposals to 5 April 2025: 10%
• Disposals 6 April 2025 to 5 April 2026: 14%
• Disposals from 6 April 2026: 18% (Finance Act 2026, Royal Assent 18 March 2026)

The 18% BADR rate from April 2026 means BADR no longer produces a large saving over the main 18% basic-rate band: the benefit is now limited to gains that would otherwise fall into the 24% higher rate band. Any business owner planning to sell in the near term should model the disposal date carefully.

UK residential property gains must be reported to HMRC and the tax paid within 60 days of completion, using the UK Property Reporting Service.

Asset type / taxpayer	Rate from 30 Oct 2024	Notes
Any asset, basic rate taxpayer	18%	Gain within the basic rate band
Any asset, higher/additional rate taxpayer	24%	Gain above the basic rate band
BADR qualifying disposal (Apr 25 to Apr 26)	14%	Up to £1m lifetime limit
BADR qualifying disposal (from Apr 26)	18%	Finance Act 2026; same as main basic rate

VAT Thresholds for 2025/26

The VAT registration threshold is £90,000 in any rolling 12-month period, raised from £85,000 on 1 April 2024 (gov.uk: when to register for VAT; VATA 1994 Sch 1). The deregistration threshold is £88,000. Standard rate 20%; reduced rate 5%; zero-rated and exempt categories per VATA 1994 Schedules 7A and 8 to 9.

The Flat Rate Scheme is available to businesses with expected taxable turnover of £150,000 or less (excluding VAT). The critical trap for service businesses: a limited cost trader must use the 16.5% rate if goods cost less than 2% of turnover or less than £1,000 per year. For most consultants and contractors, goods costs are well below both tests, making the Flat Rate Scheme uneconomic.

Making Tax Digital for VAT has applied to all VAT-registered businesses since April 2022, requiring digital record-keeping and compatible software for all VAT returns.

Key Capital Allowances for 2025/26

Capital allowances reduce taxable profit, making them the most direct deduction available for capital spend. The main rates for 2025/26:

• Annual Investment Allowance: £1,000,000 per year (100% relief on most plant and machinery; both companies and unincorporated businesses; CAA 2001 s.38A/s.51A)
• Main-rate writing-down allowance: 18% for accounting periods to 31 March 2026 (CT) / 5 April 2026 (IT), then reducing to 14% from 1 April 2026 (CT) / 6 April 2026 (IT) per Finance Act 2026 s.28 (amending CAA 2001 s.56)
• 40% first-year allowance: new and unused main-rate plant and machinery incurred from April 2026 (1 April 2026 for corporation tax; 6 April 2026 for income tax), per Finance Act 2026 s.29 (CAA 2001 ss.45U/45V)
• Full expensing (companies only): 100% FYA on new main-rate plant; 50% FYA on new special-rate plant
• Special-rate pool WDA: 6% (integral features, long-life assets; unchanged)
• Structures and Buildings Allowance: 3% per year on qualifying construction cost

Making Tax Digital for Income Tax: Mandatory Dates

MTD for Income Tax Self Assessment (MTD ITSA) will change how sole traders and landlords file tax returns. Quarterly digital updates replace the annual return for affected taxpayers. The mandatory threshold reduces in steps (gov.uk: MTD ITSA sign-up guidance):

• 6 April 2026: qualifying income above £50,000 (tested on 2024/25 income)
• 6 April 2027: qualifying income above £30,000
• 6 April 2028: qualifying income above £20,000

Qualifying income includes gross self-employment income plus gross property income. Voluntary sign-up is available ahead of the mandatory date. For a practical guide to what this means for your tax affairs, see our guide on Making Tax Digital for income tax.

Director's Loan Account and the s.455 Charge

An overdrawn director's loan account triggers a CTA 2010 s.455 charge if the loan is not repaid within 9 months and 1 day of the company's year-end. The s.455 rate equals the dividend upper rate for the tax year in which the loan is made:

• Loans made in 2025/26 (to 5 April 2026): 33.75%
• Loans made from 6 April 2026: 35.75% (Finance Act 2026 s.4 increases the dividend upper rate)

The charge is temporary: s.458 relief repays it when the loan is repaid, released or written off, but that relief is deferred to 9 months and 1 day after the end of the accounting period in which repayment occurs. Anti-avoidance rules block repay-and-redraw strategies: the 30-day rule (s.464ZA) and the arrangements rule (s.464C/s.464D) for balances of £15,000 or more. A loan exceeding £10,000 at any point creates a taxable benefit in kind under ITEPA 2003 ss.173 to 191, with Class 1A NIC at 15% on the benefit, reportable on P11D.

Planning Your Tax Position: Sole Trader versus Limited Company

The structural comparison between sole trader and limited company tax positions has narrowed in recent years. The combination of the employer NIC rate rising to 15% from April 2025 and the FA 2026 s.4 dividend rate increase to 10.75%/35.75% from April 2026 reduces the advantage of the limited company route at typical owner-manager profit levels.

The key planning levers remain:

• Pension contributions: employer pension contributions by the company are corporation-tax-deductible, carry no NIC, and are not capped by the individual's relevant earnings (subject to the £60,000 annual allowance; Finance Act 2004 s.196 and Part 4)
• Salary-dividend mix: the optimal director salary depends on whether the Employment Allowance is available; a single-director company should set salary at £5,000, not £12,570, to avoid the 15% employer NIC charge
• Timing dividends: dividends declared on or after 6 April 2026 will attract the higher FA 2026 rates; for companies with available reserves, reviewing declaration timing before 5 April 2026 is worthwhile
• Pension contributions to protect the personal allowance: if your income approaches £100,000, a pension contribution to pull adjusted net income below that threshold can restore £12,570 of personal allowance, saving up to £5,028 in additional tax

For a worked comparison of the full tax cost at different profit levels, see our sole trader allowable expenses guide, which shows how deductible business costs feed into the profit figures on which all these rates apply.

What Comes Next After Reading This Page

The brackets and rates on this page give the headline picture. The question most business owners ask next is: at my specific profit level, with my specific drawings, which structure actually costs less? The answer depends on whether you have the Employment Allowance, what you plan to do with retained profits, and whether capital allowances significantly reduce your taxable income. Our sole trader versus limited company tax calculator guide works through the full comparison at several profit levels with the correct 2025/26 and 2026/27 figures, including the FA 2026 dividend rate change.

Sources

1. gov.uk: Income Tax rates and Personal Allowances
2. gov.uk: Rates and thresholds for employers 2025 to 2026
3. gov.uk: National Insurance rates and allowances (Class 4)
4. gov.uk: Corporation Tax rates and allowances
5. gov.uk: Tax on dividends
6. Finance Act 2026 s.4 (dividend rate increase, from 6 April 2026)
7. gov.uk: Capital Gains Tax rates
8. gov.uk: Business Asset Disposal Relief
9. gov.uk: When to register for VAT
10. gov.uk: MTD for Income Tax sign-up guidance
11. CTA 2010 s.455 (loans to participators)
12. Finance Act 2026 s.28 (WDA rate reduction to 14%)
13. Finance Act 2026 s.29 (40% first-year allowance)